Quilter Cheviot market commentary - 12th August 2025

July was another good month for equities as global stock markets built on their second quarter gains, supported by resilient economic data and corporate earnings alongside favourable trade tariff developments. The MSCI All Country World Index added 5.2% (all returns total, for July and in sterling, unless otherwise stated). However, concerns remain and the recent weak US jobs data challenges the narrative of better-than-expected economic performance in the face of geopolitical challenges.

America has been at the forefront of the move higher in equities since the tariff-induced sell off in April and US stocks outperformed once more last month, with the MSCI North America Index rising 6.0%. Positive catalysts came from the extension of tax cuts from Trump’s first term with the passing of his “big, beautiful bill”, strong second quarter earnings releases and a number of international trade deals. More than two-thirds of US large caps had posted their latest earnings figures at the time of writing, with 82% beating consensus forecasts and a blended earnings growth rate of 10.3%, according to FactSet. Meta and Microsoft were among the standout performers, showing impressive growth and suggesting the AI trade is showing little sign of running out of gas just yet.

Deals made, but tariffs rise

The US has agreed a series of high-profile trade deals of late, with a 15% tariff on imports from the European Union, Japan and South Korea. China still faces more punitive levies while the UK has a 10% tariff. The average US tariff on China was 54.9% and 14.5% on the rest of the world, as of 1 August, according to the Peterson institute. This is notably higher than during the 90-day pauses and marks a significant increase on the 2.3% average level before Donald Trump took office. While agreements have reduced uncertainty, they have not eliminated it, as Trump continues to threaten tariff increases.

US labour market cooling

Since Donald Trump first announced the dramatic tariff increases in early April, investors have been looking closely for signs of its economic impact. For much of the second quarter the impact appeared contained with economic data suggesting an economy holding up fairly well and inflation, while edging higher, remaining under control.

However, the latest US jobs report showed a lower-than-expected reading of 73k in July, which, together with largescale downward revisions to previous months, suggests potentially worrying labour market weakness. The print was the lowest since the November 2024 release, but it was really the downward revisions that served as the largest cause for concern. The combined 258k downward revision for May and June is the largest two-month revision since April 2020 at the height of the Covid-19 pandemic. This leaves May as having just 19k jobs added and June just 14k, meaning three consecutive sub 100k readings after only 1 reading below that level in the past four years (and that 12k print was an anomaly due to hurricanes) The revisions also mark an acceleration of a trend seen throughout the year, as the Labor Department has lowered its initial reading for every month of 2025.

Trump responded to the news by firing the head of the Bureau of Labour Statistics, claiming that the numbers are being manipulated for political purposes. The decision raises further questions as to Trump’s overreach and attempt to influence independent organisations. Derivatives markets are now pricing a high chance (around 85% at the time of writing) that the Federal Reserve (Fed) will cut interest rates at its next policy meeting, up from 38% just a few days ago. The Fed kept rates unchanged at its July meeting, with the Fed funds rate at 4.5%.

Record high for UK stocks

UK stocks posted solid returns, as the MSCI UK rose 4.4%. The UK benchmark has posted a series of record highs in the last month and the rise in earnings alongside price has left valuations at modest levels and UK stocks arguably still look cheap compared to peers. Continental European stocks lagged a little during July, handing back some of their outperformance year-to-date. This could be explained in part by profit taking but there is also a potential threat to the rapid growth that had been priced into some European companies after the EU-US trade deal contained commitments for largescale investment in the US, potentially diluting the positive impact of stimulus measures on the European economy.

Inflation rising

The UK consumer price index hit an 18-month high of 3.6% in June, unexpectedly rising from the 3.4% prior reading. Although price pressures are far more contained than a few years ago UK inflation continues to track well above other large European countries, with the equivalent reading for Germany 2% and across the European Union 2.2%. The US figure for June was 2.7%. The move higher in inflation has weighed on bonds, with a broad-based gilt index declining 0.4% in July. Longer-dated bonds underperformed with 15-year+ gilts falling 1.2%. UK investment grade corporates managed to post a positive return though, rising 0.4%.

Division reflects BoE tight spot

Growing concerns surrounding the health of the UK economy led to the Bank of England (BoE) cutting interest rates by 25 basis points (0.25%) for the fifth time in a year following their latest policy meeting, but a deeply split vote from the Monetary Policy Committee shows some policymakers continue to be concerned more by the spectre of inflation. The knife-edge decision required a second vote, with four of the 9-member panel voting for no change and one member voting for a larger 50 basis point move. Unemployment is rising, while growth has ground to a halt once again after what now appears to have been a false dawn in the first quarter. Speculation is rife about which taxes will be raised next at the upcoming budget, weighing further on growth and consumer confidence, just as it did last year.

Summary

Global stock benchmarks finished July near record highs, driven by a resurgence in US equities. Risks have undoubtedly receded in recent months, supporting the move higher, but they have not disappeared, and we are particularly sensitive to further signs of deterioration in the US economy after the latest US jobs report. Derivatives markets are pricing in a faster pace of Fed rate cuts following the employment release and chair Jay Powell’s speech at the Jackson Hole symposium later on this month will be scrutinised for signals of a move in September. The pound depreciated 3.8% against in July, falling to US$1.32 from a high of US$1.38 in late June. Bonds continue to offer attractive valuations, and we would expect yield to move lower, adding to total returns, in the absence of inflation and/or fiscal deficit surprises.

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